Rebalancing the Workplace

In its drive for domestic consumption and social harmony, Beijing steps up labor interventions.

By

Andreas Lauffs and Jonathan Isaacs

Dec. 19, 2012 11:31 am ET

Macroeconomists have spent much of the past year talking about China's need to rebalance its economy, a key component of which will involve improving household incomes. Meanwhile, 2012 also was notable for increasing labor unrest throughout the country. The two are related in a way, and add up to a new concern for foreign companies operating in China.

The causes of many of the recent instances of labor unrest are numerous. Anything from factory closures and mass lay-offs, to employee transfers and changes in ownership of the company could ignite a collective labor dispute. Manifestations have ranged from work slowdowns and strikes, to outright occupations of factory premises, hostage taking and violence.

In tandem with this trend, the Chinese Communist Party leadership in Beijing feels a need to improve working conditions and pay to bolster social stability and aid economic rebalancing by encouraging domestic consumption. So the CCP has signalled its intention to address potential labor unrest by pushing for more "democratic" management of companies. Ostensibly this means providing employees a greater voice in how a company is managed, particularly regarding human-resources-related matters, though with CCP oversight and supervision.

Since at least 2004, the CCP has pushed private companies, including foreign-invested enterprises, to establish company unions. All such unions have to be established with the approval of and operate under the supervision of the All-China Federation of Trade Unions, or ACFTU, the sole legal union organization in China, which operates under the leadership of the CCP.

But this year, the intervention has taken a more intrusive form. In February, new national regulations required that employee representative councils be established in enterprises to carry out democratic management of the enterprise. The councils are bodies directly elected by the employees at large, that are distinct from and have different powers than unions; for example, while a union would negotiate a collective bargaining agreement, councils would vote to approve or reject the negotiated agreement.

Employees working in the Chang'an automobile factory in Beijing.
AFP/Getty Images

Such councils have long been mandatory at state-owned enterprises, but this is the first time national regulations have expanded this requirement to all enterprises. Although the text of the rules is vague on this point, it is generally believed that the regulation also applies to foreign-invested companies.

Meanwhile, in May, the Central Committee of the CCP circulated a notice urging lower-level CCP party committees and local governments to strengthen and improve the CCP's work in private companies. All private companies with at least 50 staff should have at least some CCP members, the notice said, and if a company employs at least three CCP members, then a Party organization should be established within that company.

The idea seems to be that Party organizations would take a lead in promoting "harmonious" labor relations. Among other things, the secretary of a company's Party unit could be entitled to attend important management or board meetings, and could also become chairman of the company's ACFTU-approved union. This raises the prospect that the Party will become more involved in decision-making over wages and working conditions.

In both instances, the CCP notices are not directly binding on companies and therefore many companies likely will not pay much heed to it for now. However, the notices send important signals about the Party's and government's policy intentions over the next few years.

This impression is bolstered by the fact that local chapters of the ACFTU have been taking steps to implement the so-called Rainbow Plan, first announced in 2010, under which the goal is for all companies with unions to have collective bargaining agreements in place by the end of 2013.

Local ACFTU chapters have directed company unions to request collective bargaining with management, including at private-sector companies. Local chapters also have engaged in direct negotiations with companies, rather than leaving the job to the often untrained company union. Some local-government labor bureaus have cooperated in this effort. For example, foreign-invested enterprises in certain districts of Shanghai and Shenzhen have had their applications for overtime exemption rejected for lack of a collective bargaining agreement as a way to encourage them to sign such anagreement.

The nature of negotiations also has changed. In the past, collective bargaining was generally a pro-forma exercise, with the ultimate agreement containing little of substance. But recently company unions have started bargaining harder and making tougher demands during negotiations, often under the supervision of higher-level ACFTU officials.

Taken together, this points to an overall goal of asserting more CCP oversight over labor relations at private companies. While companies are unlikely to see immediate changes, as with past high-level policy pronouncements, firms will likely start feeling an impact from the new policy directives in the coming years as the government and ACFTU start implementing the new directives. It's the latest example of Beijing's rebalancing process in action, and one foreign companies can't afford to ignore.

Mr. Lauffs is head of Baker & McKenzie's employment law practice for Hong Kong and China and author of "Employment Law & Practice in China" (Sweet & Maxwell, 2008). Mr. Isaacs is a special counsel in Baker & McKenzie's China employment law practice.

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